Growth, Income Distribution and
Democracy:
What the Data Say
Roberto Perotti, Columbia University September 1995
Introduction
• Main concern of the paper is to investigate relationship between
income distribution, democratic institution and growth.
• Three main issues;
1) The reliability of the income distribution data
2) The robustness of reduced form relationships
3) Specification issues
Main Approaches
• Fiscal policy (Alesina and Rodrik-1994)
• FP1 : The economic mechanism
• FP2 : The political mechanism
• FP3 : The reduced/simple form
• Socio-political instability
• SP1 : Investment & growth correlate with social-political instability (+)
• SP2 : Social-political instability correlate with equality (-)
• SP3 : The reduced form
Main Approaches (cont.)
• Imperfect capital market
• ICM1 : Correlation growth and investment in human capital (+)
• ICM2 : Correlation investment and equality (+)
• ICM3 : The reduced form
• “Endogenous fertility”
• Similar to imperfect capital market but with extensive relationship with
fertility (because investment in human capital and fertility are connected)
The Distribution data
• Preliminary Problems when testing the theories:
• The relevant distribution in several cases is of wealth rather than income
• The effect of income distribution on growth depend on whole shape of
distribution of income
• “Middle Class” is used as appropriate measure of equality.
• Most observations are obtained from two compilations: Jain (1975)
and Lecaillon et al. (1984)
Data are based on household surveys. Non-household
based data are adjusted.
• Three South-east Asian “tigers” ; South Korea,
Taiwan, and Korea have higher shares of middle class
than most countries
• Highest share of middle class : Denmark
• Lowest Share of middle class : Kenya
Democracy effect seems to be not robust especially when a certain
or some countries are excluded from the data
Conclusion of reduced form
(1) There is a positive association between equality and growth, although a
good deal of it is coming from intercontinental variation;
(2) This positive association is quantitatively much weaker, and statistically
insignificant, for poor countries; however, this can be explained both on
empirical and theoretical grounds;
(3) There is some indication that the association between equality and
growth is stronger in democracies; however, the democracy effect does
not seem to be very robust;
(4) Because of the high concentration of democracies in rich countries, it is
virtually impossible to distinguish an income effect from a democracy
effect in the relationship between income distribution and growth.
fiscal policy approach
•
•
•
•
•
endogenous variables at a time
estimating different simple models
social security and welfare,
healt and housing,
public expedniture on education
• GDP - per capita GDP in 1960
• MSE - average years of secondary schooling of the
male population, 1960
• FSE- average years of secondary schooling of the
female population, 1960
• PPPI - PPP value of the investment deflator,
relative to the U.S., 1960
• MTAX - average marginal tax rate between 1970
and 1985 -> fiscal policy variable
• MID - share in income of the third and fourth
quintiles
• GR: average yearly growth rate of per capita GDP,
1960-85
political instability approach
• two types of measurabe definition of instability
• exectuive instability i.e. frequency of government turnovers
• emphasizes phenomena of social unrest i.e. politial
assassinations, mass demonstrations etc.
• LAAM, ASIA, AFR– dummy
variable for different countries
• HOMOG - percentage of the
population belonging to the main
ethnic or linguistic group
• SPI: index of sociopolitical instability,
constructed as
discussed in section 6
• RICH - dummy
variable for countries
with values of GDP
higher than $1,500.
imperfect capital market and
endogenous fertility approaches
• human capital investment decision – secondaty school
enrollment
• Opportunity cost in developing countries
Conclusion
- equal societies -> lower fertility rates and higher rates
of investment in education
- unequal societies -> politicaly and socially unstable,
lower rates of investment and growth
- Data does not show that more equal societies grow
faster
References
• Alesina, A. and R. Perotti (1995): Income Distribution, Political Instability,
and Invest- ment, forthcoming, European Economic Review;
• Alesina, A. and D. Rodrik (1994): Distributive Politics and Economic
Growth, Quarterly Journal of Economics, 109, 465-90;
• Banerijee, A. and A. Newman (1991): Risk Bearing and the Theory of
Income Distribution, Review of Economic Studies, 58 211-35;
• Barro, R. J. (1994): Democracy and Growth, NBER working paper No.
4909;
• Galor, 0. and J. Zeira (1993): Income Distribution and Macroeconomics,
Review of Economic Studies, 60, 35-52;
• Jain, S. (1975): Size Distribution of Income: A Compilation of Data,
World Bank, Washington, D.C.;
• Lecaillon, J. et al. (1984): Income Distribution and Economic
Development, ILO, Geneva;